These measures converge to the common purpose of the national and European authorities to have a unified view over the globalised banking sector as well as to re-enforce their role in financial stability. These changes were due to the commitment of the Romanian Authorities to a new preventive finance arrangement with the European Union, IMF and World Bank. Also, in 2012, the enforcement of the cooperation and harmonization framework in a new collaboration step under the Viena European Initiative for Banking Coordination 2.0 was set as a primary goal for national regulators. This initiative sets up a better cooperation between the regulators in the origin European countries and those in host-countries for the purpose of preventing erratic financial dealing.
The IFRS transition was guided by the National Bank of Romania (NBR) in such a way as to prevent any irregularities in computing prudential indicators. The International Standards assume that the allowances for loans are to be recorded as a consequence of a default event, while the former national regulations imposed that allowances were recorded based on expected losses. This used to lead to the ex ante recognition of losses in the financial statements, i.e: a decrease in annual profits. The concern was that, with the transition to IFRS, banks would increase their profits and thus improve their own funds position in the calculation of capital adequacy ratios. This was prevented by the NBR through the Order 26 issued in December 2011, which sets the framework for reporting of prudential filters, starting with January 2012. Based on the analysis performed on financial reporting as at 31 December 2011 and 31 March 2012, NBR decided to maintain prudential filters after 1 January 2013 as well.
Additional measures taken by NBR were targeted to the monitoring of correct capitalization of risks in the Romanian banking sector. Capitalization was, in 2012 like in previous periods, assured by the shareholders. Other capitalization movements referred to the take-over of Emporiki Bank Romania by the French group Credit Agricole and the recent takeover by Piraeus Bank of the good assets of ATE Bank (including the Romanian branch). These restructurings did not affect the capitalization ratios and did not assume state intervention. The net increases in the social capital of banks reached EUR 550 million in the first semester of 2012. The solvency ratio reached a level of 14.7 in June 2012 (EU minimum level required: 8%).
The banks’ biggest problem was in 2012 the same as in the previous 2 years: the quality of the loan portfolio. The level of non-performing loans (NPLs) continued to grow in 2012 rising from a level of 14.3% in December 2011 to 16.8% in June 2012. The growth is due, in part, to the introduction of IFRS, whereby banks are obliged to recognize losses from loans previously recognized off-balance sheets. Also, in 2012, banks re-valued the performance of customers whose loans they had re-structured in previous years.
The transition to IFRS has been followed-up by the National Bank through the requirement of prudential filters, whereby banks are required to compute solvency ratios based on recognition criteria that are stricter than the ones required by IFRS. The latest stress-testing results show, that on a two years horizon, the Romanian banking entities have the capacity to overcome strong macro-economic shocks. These tests show that in the adverse scenario case where Romania re-enters the recession and the national currency incur heavy devaluation against foreign currencies, the solvency ratio would drop to 12.3%, maintaining an acceptable level.